NEW YORK (Money Magazine) - Investors have no shortage of problems to worry about right now: rising unemployment, the likely end to the refinancing boom, continued uncertainty in the Middle East.

From a longer-term perspective, though, the picture looks brighter. Low interest rates and heavy government spending combined with tax cuts should stimulate the economy. Gross domestic product has risen for five straight quarters and is projected to keep increasing.

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Moreover, despite widespread pessimism, a lack of confidence in the top management of many companies and sporadic earnings disappointments, corporate profits are picking up overall.

Most important, the prices of most high-quality stocks are no longer wildly overvalued.

We don't know how long the current market uncertainty will last. But we do know that even in the face of everyone's worries, the economy has been slowly improving and is likely to continue doing so.

And we also know that at some point, the stock market will be due for the 20 percent-plus rebound that normally occurs when any business cycle turns from slump to expansion.

At this moment, there are plenty of ways that long-term investors can play the inevitable recovery. Some people will look to growth stocks, betting on a comeback for former technology favorites.

Others will focus on blue chips like General Electric and Johnson & Johnson. Still others will prospect for bargains among value stocks. In fact, all these sectors stand to gain.

But there's one group that is particularly timely right now -- and yet likely to be overlooked by many investors.

I'm talking about cyclical stocks, the shares of companies that are especially sensitive to changes in the level of economic activity. Smart investing in cyclicals requires a different strategy from the approach investors generally take to other stock groups.

The key to successful cyclical investing is to buy before an economic upturn becomes evident. In general, cyclical stocks have slower core growth rates than blue chips do.

Nonetheless, cyclicals can offer above-average gains if you buy when share prices are most depressed, which invariably occurs during recessions or economic slowdowns.

As soon as an economic upturn is clearly under way, though, the stocks can rebound quite suddenly and turn in most of their gains in just a few quarters.

With the economy slowly gathering momentum after three years of slow growth and recession, it looks to me as though just such a buying opportunity is at hand.

While there's no way of knowing exactly when the stocks will have the big run, their average returns over the next three years figure to be quite attractive. Moreover, cyclicals offer valuable diversification to a portfolio heavy in blue chips and growth stocks.

Investors considering cyclicals should start with four included among the 30 Dow stocks -- Alcoa, Caterpillar, DuPont and International Paper.

All four are financially strong, with dominant positions in their markets. Their long-term total annual return potential -- based on core growth rates and dividend yield -- is only average, ranging from just under 10 percent to a little over 14 percent. But their chances of a sharp rebound in the next year or so are high.

Such companies are stuck with enormous overhead and can't reduce costs easily when business is poor. The prices of the basic items they sell also fluctuate with demand.

The result: Earnings plunge in a slowdown. But as soon as demand picks up again, squeezed margins snap right back.

Playing the cycles The key to making money in cyclical stocks is to buy when shares are deeply depressed -- and before it's clear the economy is about to heat up. Company (ticker)  Price  Range since 1998  P/E  Dividend Yield  Alcoa (AA)  $21.28  $15 to $46  13.0  2.8%  Caterpillar (CAT)  $52.98  $30 to $66  15.6  2.6%  DuPont (DD)  $39.48  $33 to $84  16.2  3.5%  International Paper (IP)  $33.74  $26 to $62  12.8  3.0%   Prices as of 4/11/03. P/E based on estimates for 2004.  Source:  Thomson/Baseline

Assuming that an economic recovery begins before year-end, these four companies are projected to post earnings increases of more than 20 percent in 2004.

The stocks have other key things in common too. While they've all started to recover from October's lows, they're still cheap -- trading at relatively moderate price/earnings ratios based on estimated profits for next year.

In addition, the stocks carry yields of at least 2.6 percent.

Here's a brief look at each of them.

Alcoa The world's largest aluminum producer has been hit by weak demand for the lightweight metal. Revenue was down slightly last year, compared with 2001. In response, the company has been trimming costs and selling noncore businesses.

In 2002, Alcoa managed cost savings of $600 million; it expects to slash another $400 million this year.

At around $21, Alcoa's share price is down more than 50 percent from its 2001 high. Based on the expected gain in earnings next year, the stock trades at a P/E of 13 and yields 2.8 percent.

Caterpillar The world's biggest maker of earth-moving equipment has suffered recently from the drop-off in construction. Earnings were flat last year and are expected to slip another 5 percent in 2003.

But with a recovery in capital spending next year, earnings could rocket up by more than 50 percent. Based on those 2004 results, the stock is currently trading at a P/E of 15.6. The shares, at nearly $53, are down 20 percent from their 1999 high and yield 2.6 percent.

DuPont In addition to the problems stemming from the slow economy that affect other cyclicals, the largest producer of chemicals in the U.S. has been hurt by the recent inflation in oil prices, since petroleum serves as an important raw material for many chemicals.

During the run-up to the Iraq war, oil went as high as $36 a barrel (then fell back to $27). As a result, DuPont shares fell as low as $35, down 58 percent from their 1998 high, before recovering a bit. If oil prices continue to ease, DuPont's earnings could rise by a third next year.

That would translate into P/E of a little more than 16 for the $40 stock, which currently yields 3.5 percent.

International Paper The world's largest paper and forest-products company has been focusing its strategy over the past few years, acquiring firms in its main businesses and shedding some noncore assets.

As a result, IP could reach higher peak earnings over the next cycle. Nonetheless, the share price is down more than 40 percent from its 1998 high. And at around $34, IP stock trades for less than 13 times 2004 results and yields 3 percent.

Earnings projections for next year vary a lot, but some analysts think profits could more than double from today's depressed levels. That would give IP the biggest rebound of the group.

Michael Sivy can be reached at sivy_on_stocks@moneymail.com.